You may have heard of the estate tax, but chances are you will never have to pay it, especially now that the Senate has set the exemption at $5 million.
That means that if you inherit an estate, likely because you were born with the right last name, you won’t have to pay taxes on any of it unless its value is over $5,000,000 — then you’ll pay 40 percent on the amount above that, about the same as the new top rate on high earners. And that $5,000,000 exemption will be adjusted for inflation yearly.
During the Clinton era, there was a $1,000,000 exemption not adjusted for inflation, with a 55 percent estate tax.
Bush and the Republican Congresses phased out that tax entirely by 2010. So what the Senate approved is an improvement on nothing. However, in a time when sacrifices are being demanded to reduce the deficit, wouldn’t the wealthy children of the uber-wealthy be a nice place to start?
The Atlantic‘s Matt O’Brien points out that the cost of Senate’s Estate Tax “compromise” is about $375 billion over the next decade, which is twice the amount that would be saved by switching to the “chained CPI” method, which would slow the growth of Social Security benefits, eventually costing the poorest seniors more than $1,000 a year in benefits.
So why is the Senate so concerned about protecting inheritances of very wealthy? It could have something to do with the fact that their average net worth was $13,989,022.98 in 2009, and is probably much higher now. They are among the less than 1 percent of America who have to even consider if their inheritance will be taxed.
The arguments against the estate tax usually begin with claiming that it’s double taxation. The “job creator” already paid taxes on that money. But the inheritor certainly hasn’t.
Influential Democratic senator Max Baucus (D-MO) fought to keep the estate tax exemption high, claiming that doing so and allowing couples to combine their exemptions to $10 million will help farmers pass their “agricultural assets” on to their children. So instead of trying to carve out a special exemption for family farms, Paris Hilton and Tagg Romney will not be asked to sacrifice, but millions of seniors will.
How can the Senate get away with this? Well, simply put, the estate tax is unpopular.
Taxing the rich is incredibly popular — almost Clinton-level popular. But when it’s been polled in the past, voters seemed to reject the estate tax. Why?
Mother Jones‘ Kevin Drum suggests, “Like it or not, I think that most people simply have an instinctive feeling that you should be able to bequeath your money to whoever you want.” He suggest that the idea of inheritances brings up a “very deep, very primitive protective instinct that most people sympathize with no matter how rich you are.”
The estate tax invokes primal urges, as does Social Security.
If you asked a group of voters with a net worth closer to the average American family’s net worth, $77,300, you could probably guess which they’d rather preserve.